How industries without smokestacks can address Africa’s youth unemployment crisis

By some estimates, Africa’s working-age population will grow by approximately 450 million people—about 3 percent per annum—between 2015 and 2035. By 2050, Africa will have 362 million young people between the ages of 15 and 24 years old.1 Where will the region find the jobs for such a rapidly growing young population? In the past, the answer has been industry. Historically, industry has led to structural change—the movement of workers from lower to higher productivity employment. In East Asia, large numbers of workers leaving agriculture moved into manufacturing, driving growth, job creation, and poverty reduction.

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In contrast, Africa has deindustrialized. Today, its share of global manufacturing is smaller than in 1980 and the share of manufacturing in GDP is less than half of the average for all developing countries. As a result, structural change in Africa looks very different from East Asia. In Africa, three-quarters of new entrants to the labor market will work in self-employment or in microenterprises. Some 20 percent will work for wages in the service sector, and only about 4 to 5 percent will find a wage-paying job in industry. If these trends continue, only about 100 million of the 450 million Africans expected to reach working age over the next two decades can hope to find decent work. The growing population of more educated and urbanized youth encountering few jobs is a crisis in the making.

Why has Africa failed to industrialize? First, the success of East Asia as a manufacturing center means that—unlike when that region broke into global markets—African industry faces a highly productive, relatively low wage competitor. Second, industry has declined as a share of output and employment at all levels of development over the past four decades, suggesting that Africa may not be able to rely on industry to lead structural change to the extent that it did in East Asia. Third, the growth of global value chains (GVCs) brings both opportunities and challenges. GVCs offer the opportunity to specialize in a limited set of tasks suited to a country’s capabilities, but they place a strong premium on trade logistics, an area in which Africa’s economies have not excelled. Finally, the share of natural capital in Africa’s aggregate wealth is the second-highest in the world, and resource-abundant economies face strong headwinds in industrializing.

The same forces that limit Africa’s opportunities in industry, however, are also creating a growing number of tradable services—such as tourism and remote office services—and agribusinesses— including horticulture—that share many characteristics with manufacturing, especially the capacity to create better jobs. Like manufacturing, they benefit from productivity growth, scale, and agglomeration economies. These “industries without smokestacks” are among Africa’s most dynamic sectors of economies. Information and communications technology (ICT) based services, tourism, and transport are outpacing the growth of manufacturing in many African countries. Between 1998 and 2015, Africa’s services exports grew more than six times faster than merchandise exports. Tourism alone accounts for at least 3 percent of sub-Saharan Africa’s GDP.

Between 2002 and 2015 exports of tradable services and agri-business increased as a share of non-mineral exports by an average of 58 percent. High value agricultural exports account for an increasing share of Africa’s overall exports, and Ethiopia, Ghana, Senegal, and South Africa have succeeded in breaking into GVCs in horticulture. Horticultural exports from Senegal to Europe have grown rapidly, averaging 20 percent per year. Kenya, Rwanda, Senegal, and South Africa have growing ICT-based services sectors, while transit trade is Tanzania’s second largest foreign exchange earner.

Changing prospects for manufacturing and the growing relevance of industries without smokestacks may make us rethink the sources of structural change in Africa.

Research by Brookings and the United Nations University World Institute for Development Economics Research gives some, but not full, insight into the role industries without smokestacks can play in generating better jobs for Africans. That is largely because our statistics are not well adapted to the task. For example, the tourism sector is made up of several different industries including but not limited to accommodation, food and beverage, transportation, and culture, sports, and recreational services. Thus, while it is possible to track tourist arrivals, estimates of their direct and indirect effect on output and employment are necessarily imprecise. Similar considerations apply to agri-business, horticulture, and tradable services. Better statistics on these industries without smokestacks are a must.

Nevertheless, country-level data suggest that the employment impact of industries without smokestacks can be considerable. In South Africa, tourism creates 680,000 jobs, including 36 percent of jobs in the food and beverage industry. In Tanzania, tourism accounts for approximately 14 percent of GDP, and about 3.2 percent of total employment, and in Ethiopia, the travel and tourism sector contributes about 11.3 percent of GDP and 9.8 percent of employment. Horticulture generates jobs for rural laborers and unskilled or semi-skilled processing factory workers. Kenya’s cut flower industry employs between 40,000 and 70,000 workers, while in Ethiopia flower exports generate more than 180,000 jobs. In South Africa fruit packing alone employs about 300,000 workers.

Changing prospects for manufacturing and the growing relevance of industries without smokestacks may make us rethink the sources of structural change in Africa. The region’s resource endowments suggest that many of the region’s internationally competitive industries are likely to be industries without smokestacks. The good news is that because tradable services, agro-industry, and horticulture share many firm characteristics with manufacturing, policies designed to promote the growth of manufacturing—such as improving trade logistics, investing in infrastructure and skills, and promoting exports— apply equally to tradable services and agri-business. The key to solving the employment problem is to develop an effective strategy for structural change that spans industries with and without smokestacks. We set out some elements of that strategy in a new book, Industries Without Smokestacks: Industrialization in Africa Reconsidered (OUP, 2018), available on open access.2 While much of the discussion has focused on the supply side of the labor market in Africa, less emphasis has been given to the demand side. Promoting industries without smokestacks offers a complementary demand-side approach to address the continent’s jobs crisis.